Podcast Summary: Evaluating Total Shareholder Return as a Long-Term Incentive Metric

In this episode of the Executive Compensation Podcast, hosts Ryan Harvey, Chris Havey, and Jim Kzirian explore the use of Total Shareholder Return (TSR) as a long-term incentive metric. Total Shareholder Return (TSR) is a metric that measures a company’s performance by combining stock price improvement and dividends. It is often measured relative to a peer group or an index, where a company ranks itself within that group to determine payouts. TSR is primarily used in long-term incentive plans.

TSR is a Popular Metric: Over the past 15 years, TSR has grown in popularity as a performance metric in long-term incentive plans, with over 60% of companies using it. It has become the most commonly used performance measure.

Advantages of TSR:

No Goal Setting: Relative TSR doesn’t require companies to set specific performance goals, making it attractive for long-term incentive plans.

Shareholder Alignment: TSR aligns executive pay with shareholder value, promoting transparency and easy communication.

Resilience: Relative TSR remains relevant even in challenging economic conditions, making it a resilient metric.

Proxy Advisor Alignment: While not a specific preference, TSR aligns with how proxy advisors and institutional shareholders assess performance.

Challenges of TSR:

Peer Group Selection: Choosing an appropriate peer group for relative TSR comparisons can be challenging and requires business model similarity.

Accounting Expense: TSR-based incentives create a fixed accounting expense, which can be higher or lower than the actual value realized.

Lack of Control: Executives may have limited control over a company’s share price, affecting TSR outcomes.

Trends in TSR Usage:

De-emphasis of TSR: Some companies are reducing the weighting of TSR in their incentive plans and diversifying performance metrics.

Absolute TSR: In certain situations, companies use absolute TSR as a metric, especially in turnaround scenarios or for special awards.

TSR Modifiers: Companies are using TSR as a modifier or kicker, adjusting payouts based on extreme TSR outcomes.

The podcast provides valuable insights into the use of TSR as a performance metric in executive compensation plans. It highlights the benefits and challenges associated with TSR and how companies are adapting to ensure it aligns effectively with their compensation strategies.

Evaluating Total Shareholder Return as a Long-Term Incentive Metric – Meridian Compensation Partners (meridiancp.com)

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